With the analysts predicting that emerging markets will account for the majority of future economic growth and gross domestic product (GDP) power, having exposure to the faster moving nations is essential. Their expanding wealth profiles and population demographics help cement the investment thesis. Funds like the SPDR S&P Emerging Markets (ARCA:GMM) have become popular portfolio additions, as investors have sought to capitalize on the trends. However, not all roads into the emerging world are as obvious as buying an emerging market fund. There may be another approach to gain access to these faster markets at unbelievable cheap levels. (To know more about emerging market, read: What Is An Emerging Market Economy?)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

The Land of the Emerging Sun
When investor's think about high growth opportunities, Japan never makes the list. Overall, the nation has been viewed, by many investors, as one of the most unfavorable markets for at least 20 years, ever since the 1980s crash and resulting crippling deflation. However, that impression may be changing. Japan is quickly transforming itself from a leading exporter to the developed world, to Asia's emerging go-to supplier.

About 56% of Japanese exports head into China, while another 16% go to other emerging markets in Asia. The key is Japan's dominance across a variety of high tech sectors, outside of consumer electronics. Ironically, the nation's nuclear reactor designs are gaining traction throughout the rest of Asia. A partnership between Japanese reactor designers and the nation's government, has begun expanding marketing of multibillion dollar projects towards energy-hungry countries like Indonesia. Recent fruits of this effort include a $13 billion project to build two reactors in southern Vietnam. Japan is also seeing big export gains across a mixture of infrastructure and pollution remediation equipment. The nation is a leader in clean energy, and advanced transportation systems like bullet trains. As emerging Asia continues to build out its infrastructure, Japan will be a major beneficiary of this construction. In addition, Japan is seeing increased levels of "shopping tourism." Last year, travel restrictions between China and Japan were lifted, and Chinese middle-class residents have been flocking to Japan's shores to gain access to luxury goods and higher quality products.

Finally, Japan's equity markets continue to flaunt their "cheapness." The broad iShares S&P/TOPIX 150 Index (ARCA:ITF) is trading roughly at book value and yields more than 2%. Japanese firms generated more than 6 trillion yen in free cash flow in 2010, and more than 45% of all firms have more cash than debt on their balance sheets. (For additional reading, check out: Should You Invest In Emerging Markets?)

Playing Japan's New Emerged Dominance
For investors, Japan's newly minted status as Asia's emerging go-to supplier could be the catalyst it needs to finally break out of its doldrums. Adding broad plays like the iShares MSCI Japan Index (ARCA:EWJ) or WisdomTree Japan Small-Cap Dividend (ARCA:DFJ) make ideal ways to play the entire Japanese story. However, some of the best plays for the nation could be in individual stocks.

With the World Nuclear Association predicting that the number of nuclear power plants will more than double in the next 15 years, reactor designers Hitachi (NYSE: HIT) and Toshiba Corp. (OTCBB:TOSBF) will be major winners. Even if that doesn't pan out, both firms have a variety of infrastructure, consumer electronics and industrial products that the emerging world is craving. In addition, the firms are still cheap, trading for forward P/E's under 10.

While Caterpillar (NYSE: CAT) often gets the nod from investors as the top construction play, Japan's Kubota (NYSE:KUB) and Komatsu (OTCBB:KMTUY) could be better buys. Both offer heavy machinery for construction, farming and industrial uses. Kubota's price-to-book ratio is around 6, and Komatsu was the first heavy machinery firm to offer hybrid versions of a few of its excavators.

The Bottom Line
Japan's recent expansion as a major exporter to Asia's emerging markets could be its saving grace. For investors, this could be the time to add the nation to a portfolio. The previous firms, along with sogo shosha's like Sumitomo Corporation (OTCBB:SSUMY), make ideal selections. (For additional reading, check out: The Risks Of Investing In Emerging Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    Comparing ETFs Vs. Mutual Funds For Tax Efficiency

    Explore a comparison of mutual funds and exchange-traded funds, or ETFs, and learn what makes ETFs a significantly more tax-efficient investment.
  2. Mutual Funds & ETFs

    ETF Analysis: Vanguard Small-Cap Value

    Find out about the Vanguard Small-Cap Value ETF, and explore detailed analysis of its characteristics, suitability, recommendations and historical statistics.
  3. Mutual Funds & ETFs

    ETF Analysis: Vanguard Intermediate-Term Corp Bd

    Learn about the Vanguard Intermediate-Term Corporate Bond ETF, and explore detailed analysis of the fund's characteristics, risks and historical statistics.
  4. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares 10-20 Year Treasury Bond

    Learn about the iShares 1-20 Year Treasury Bond ETF and its holdings, and understand why investors may be better served to look at other bond funds.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Global Telecom

    Learn about the iShares Global Telecom exchange-traded fund, which invests in U.S. and foreign telecommunication companies with high dividend yields.
  7. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  8. Mutual Funds & ETFs

    ETF Analysis: United States Brent Oil Fund

    Learn more about the United States Brent Oil exchange-traded fund, the characteristics of the fund and the suitability and recommendations of it.
  9. Mutual Funds & ETFs

    ETF Analysis: ProShares Ultra Bloomberg Crude Oil

    Find out more about the ProShares Ultra Bloomberg Crude Oil ETF, the characteristics of UCO and the suitability and recommendations of UCO for investors.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Hong Kong

    Learn about the iShares MSCI Hong Kong fund, which invests in various equities of companies listed on the Hong Kong Stock Exchange.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!